Information Memorandum for Insurance Broking And Risk Manage

KENNARDS SELF STORAGE

We consider the potential for impact on the self-storage sector to be mixed. From an operational perspective, the most likely impact will be occupancy levels and therefore rental rate level. In the first instance, tenants may seek rental abatements (rent free periods) which, if offered, will result in a reduction in storage income for the affected period. Further, during times of economic uncertainty households look to eradicate surplus spending, meaning tenants who can no longer afford the service may elect to move out resulting in a decrease in occupancy. This more stringent household budgeting also flows onto a drop in overall retail expenditure nationally, which should lead to a drop in the need to store goods and therefore further impacting occupancy levels. However, we may see spikes in new enquiries from small business operators looking to store merchandise might have to close for the foreseeable future. In an effort to offset this, we anticipate self-storage operators will offer various discounting to monthly tariffs, which may include some sort of rent free period. This level of discounting will act as an incentive and would attract tenants to remain in place however noting such would have a negative impact on rental levels. Further, we envisage an increase in people looking to downsize in an effort to minimise spending and/or under financial hardship, which therefore would result in an uplift in the need for storage services. Operators could also look to reduce salary and wages to counterbalance any negative operational performance. We have considered this and on balance we consider the decrease in occupancy levels to be marginal for properties like the subject. Notwithstanding, our analysis over the period of March and April of part of a major market participants portfolio 24 properties revealed little impact from COVID-19. Facilities with an NSA of over 8,000m² had a slight drop in occupancy from 1% to 2% where facilities below that mark of NSA appeared to remain at sustainable levels. Further, we are aware of rental abatements being offered over this 2 month period. Our investigations revealed only 1.3% of existing customers which totalled approximately $97,000 received an abatement and with the abatements appearing to taper off moving into the month of May as social distancing restrictions eased. These results demonstrate the resilient nature of the self- storage asset class. From an investment perspective, purchaser activity in this sector is domestic and generally dominated by two major participants each with extensive portfolios capable of absorbing any adverse market conditions in the short term. These two market participants will look to acquire quality assets at attractive prices over the next 12 months. Notwithstanding, the market may be affected where access to financing is impacted. This coupled with a weaker global economy generally may affect investor demand. Where the virus peaks and eases within a reasonable timeframe and this impact on demand is short term we may well see a spike in activity in the latter period of 2020. Market Outlook The increasing population is making Australia become more densely populated within its major cities. This is proving to be a positive influence on the sector, supported by low interest rates offered from financial institutions and generally overall customer awareness of the sector. When COVID-19 peaks and eases, global markets will take some time to recover. As a result of this recovery period, we would anticipate little to no rental rate growth over the next 12-month period.

The market has recently experienced a relatively stable period with strong demand particularly from existing market participants. However, our short-term outlook is cautious for the sector given unknown implications of COVID-19.

Information Memorandum Kennards Self Storage June 2020 7